Sovereign Annuities – How will they work?

The scale of the funding crisis in Defined Benefit Schemes has been a topic of much debate for the last number of years. One of the solutions proposed by government was to introduce a Sovereign Annuity option. As the yield on Irish Government bonds is higher than the yield on the bonds normally used to back annuity the effect should be to reduce the scheme’s liabilities. Thus a sovereign annuity is designed to ease funding pressures on a Defined Benefit scheme, provide a source of funds to the State and also to adjust the priority rules in a more acceptable manner.

The first sovereign annuity product is due to be launched in the coming weeks. Initially, this sovereign annuity product will be based on Irish and French bonds. It is expected that this will mainly be of interest to schemes which are in wind up and in some cases where the employer company is also in liquidation. It is estimated that the total value of the sovereign annuity market will be approximately €2-3 billion.

However this sovereign annuity product will only be available to pensioners and not to active and deferred members. This causes a dilemma for the trustees: are you disadvantaging pensioners (by linking their pensions to sovereign annuities) to improve the position of other member classes (by increasing the amount of the fund available to pay for their benefits)?

So it remains to be seen how sovereign annuities will work in practical terms. It will be interesting to see how trustees and pension scheme members will react to this new and long awaited product.

Aisling Daly

Independent Trustee Limited